Deluxe(DLX) - 2018 Q4 - Annual Report

Business Overview Company Overview The company has evolved from check printing to providing technology-enabled solutions for millions of business and financial customers - Deluxe Corporation has transformed from a check printing company to a provider of trusted technology-enabled solutions, aiming to help customers grow[9] - The company serves approximately 4.8 million Small Business Services customers, 4.7 million Direct Checks customers, and 4,600 Financial Services customers[9] Product and Service Offerings The company's offerings are shifting from traditional checks and forms to growing Marketing Solutions and Other Services (MOS) - Marketing solutions and other services (MOS) include small business marketing, web services, data-driven marketing, treasury management, and fraud/security services[10][11][12][13][14] - Checks remain a significant offering, representing 37.1% of Small Business Services revenue, 38.6% of Financial Services revenue, and 84.0% of Direct Checks revenue in 2018[15] Revenue by Product and Service Category (as % of Consolidated Revenue) | Category | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Marketing solutions and other services: | | | | | | | Small business marketing solutions | 14.6% | 13.3% | 13.1% | 11.8% | 10.0% | | Web services | 8.1% | 6.7% | 6.3% | 6.3% | 7.2% | | Data-driven marketing solutions | 7.4% | 7.7% | 2.7% | 1.2% | 1.1% | | Treasury management solutions | 7.4% | 5.5% | 5.0% | 4.2% | 1.0% | | Fraud, security, risk management and operational services | 4.5% | 5.2% | 6.3% | 6.5% | 6.2% | | Total MOS | 42.0%| 38.4%| 33.4%| 30.0%| 25.5%| | Checks | 40.6% | 43.3% | 46.8% | 49.3% | 52.0% | | Forms, accessories and other products | 17.4% | 18.3% | 19.8% | 20.7% | 22.5% | | Total revenue | 100.0%| 100.0%| 100.0%| 100.0%| 100.0%| Business Segments The company operates through three segments: Small Business Services, Financial Services, and Direct Checks, each with distinct strategies Small Business Services This largest segment provides products and services to small businesses, focusing on expanding higher-growth MOS offerings - Small Business Services is the largest segment by revenue and operating income, focused on profitable growth[21] - Key strategies include optimizing sales channels, expanding higher-growth MOS offerings to offset declining check/forms usage, increasing brand awareness, and optimizing cost structure[23] - Specific strategies for Web services include improving digital marketing customer experience, accelerating brand awareness, and scaling payroll services[24] - Payments and marketing solutions strategies focus on optimizing ePayments with financial institutions, core check retention, and scaling integrated marketing-on-demand solutions[26] Financial Services This segment serves financial institutions by expanding beyond checks to software and cloud-based management solutions - Financial Services sells products and services primarily through a direct sales force to financial institutions, expanding beyond checks to software and cloud-based solutions[30] - Strategies include expanding higher-growth MOS offerings, optimizing core check revenue streams, and optimizing cost and expense structure[31] - Specific strategies for Data-driven marketing solutions involve leveraging analytics to grow depository and lending products and assessing acquisitions[32] - Treasury management solutions strategies focus on profitable scaling, integrating previous acquisitions, and assessing potential acquisitions[34] Direct Checks This leading direct-to-consumer check supplier focuses on maximizing customer lifetime value and optimizing costs - Direct Checks is the nation's leading direct-to-consumer check supplier, operating under various brand names[39] - Competition is primarily based on price and design, with a focus on offering attractive images and lower prices than the financial institution channel[41][42] - Strategies include maximizing customer lifetime value, optimizing cost and expense structure, and optimizing cash flow, with internet advertising being the most cost-effective marketing method[43][44] Manufacturing and Fulfillment/Sustainable Practices The company focuses on operational efficiency through lean principles, facility consolidation, and sustainability initiatives - The company uses lean operating principles and a shared services approach to optimize capacity, enhance operational excellence, and foster continuous improvement in manufacturing and fulfillment[45] - Deluxe has reduced the number of production facilities by integrating operations into existing locations, including closing facilities in California and Texas in 2018[46] - Sustainability initiatives include purchasing over 90% of check and forms paper from Forest Stewardship Council certified mills, using environmentally-friendly janitorial supplies, and reducing resource consumption[47] Cybersecurity The company maintains a risk-based cybersecurity program with a defensive in-depth strategy to protect company and customer data - Deluxe employs a risk-based cybersecurity program with a defensive in-depth strategy, utilizing multiple layers of security controls[48] - The program includes a cross-functional Enterprise Risk Council, an Enterprise Information Risk Management program, and Cyber Incident Response teams[48] Industry Overview The industry is characterized by a secular decline in check usage, intense competition, and a shift toward digital solutions Checks Industry The U.S. check industry continues its long-term decline due to the increasing adoption of alternative payment methods - The total number of checks written in the U.S. has been declining since the mid-1990s, with a 4.8% annual decline between 2012 and 2015[49][106] - Alternative payment methods (credit/debit cards, direct deposit, digital wallets, cryptocurrencies) are contributing to the decline in check usage[49][50][106][108] - Consumer spending and private sector employment growth in 2018 had a slightly positive impact on personal check businesses, and housing units completed increased approximately 4% in 2018 through November[51][162] Small Business Customers Small business optimism was positive in 2018 but showed uncertainty by year-end, while check and form sales continue to decline - There were over 32 million small businesses in the U.S. in 2016 and approximately 4 million in Canada in 2018[52] - The NFIB index of small business optimism averaged 106.7 in 2018 (up from 104.8 in 2017), but expectations for future conditions decreased significantly by December 2018, indicating uncertainty[53][161] - Sales of business checks and forms are declining due to alternative payment methods and technological improvements offering alternative means for business transactions[53][110] Financial Institution Clients Financial institutions face significant pricing pressure on check revenue due to declining usage and industry consolidation - Financial institutions are experiencing significant pricing pressure on check revenue due to secular decline in check usage and industry consolidation[55] - Mergers and acquisitions among financial institutions lead to intense price competition for check supply contracts[55] - Prepaid product discounts (cash incentives) are a common practice, negatively impacting check producers' cash flows at the beginning of contracts[55][59] Competition The company faces intense competition across all segments from traditional printers, online providers, and financial technology services - Small Business Services faces competition from traditional printers, office superstores, web design/hosting companies, online printers, email/social media marketing services, and resellers[56][57] - The check printing industry competes with another large check printer, direct mail/internet sellers, check printing software vendors, and significant retailers, in addition to alternative payment methods[58] - Financial Services MOS offerings compete with financial institution core banking software providers, advertising agencies, data/analytics marketing solutions providers, and financial technology services providers[60] Seasonality The company experiences seasonal sales trends, with stronger sales in the first and fourth quarters for specific product categories - Holiday card, retail packaging, and rewards/loyalty solution sales are typically stronger in the fourth quarter[61] - Tax forms sales are stronger in the first and fourth quarters, and Direct Checks sales are historically stronger in the first quarter[61] Materials, Supplies and Service Providers The company relies on various sources for raw materials and third-party providers for key IT and data services - Principal materials include paper, plastics, ink, cartons, and printing plate material, purchased from various sources[62] - Third-party providers supply information technology services (telecommunications, network server, transaction processing) and data for proprietary databases[63] Governmental Regulation The company is subject to numerous laws and regulations, with significant compliance costs and focus on data privacy - The company is subject to extensive regulations in areas such as labor, advertising, taxation, data privacy and security, digital content, and consumer protection[64] - The California Consumer Privacy Act (CCPA), effective January 1, 2020, requires proactive privacy notices to consumers when personal information is collected, and its impact is currently being assessed[66][145] Intellectual Property The company protects its intellectual property through various legal measures, which offer limited protection against infringement - Intellectual property is protected through trademark and copyright laws, trade secret and patent protection, and confidentiality and license agreements[67] - Protective measures offer limited protection against infringement, misappropriation, or independent development of equivalent products/services[67] Employees As of December 31, 2018, the company employed 6,701 people, with employee relations considered good - As of December 31, 2018, Deluxe had a total of 6,701 employees (5,934 in US, 660 in Canada, 107 in Australia/Europe)[68][185] - No employees are represented by labor unions, and employee relations are considered good[68] Availability of Commission Filings The company's SEC filings are publicly available on its investor relations website and the SEC website - Annual, quarterly, and current reports are available on Deluxe's investor relations website and the SEC website[69] Code of Ethics and Corporate Governance Guidelines The company has adopted a Code of Business Ethics applicable to all employees and the board of directors - A Code of Business Ethics applies to all employees and the board of directors, available on Deluxe.com/investor[71] Executive Officers of the Registrant The company's executive officers are elected annually by the board of directors and lead key business and functional areas Executive Officers as of February 2019 | Name | Age | Present Position | Executive Officer Since | | :--- | :-- | :--- | :--- | | Pete Godich | 54 | Senior Vice President, Financial Services | 2008 | | Julie Loosbrock | 59 | Senior Vice President, Human Resources | 2008 | | Malcolm McRoberts | 54 | Senior Vice President, Small Business Services | 2008 | | Tracey Engelhardt | 54 | Senior Vice President, Direct-to-Consumer | 2012 | | Michael Mathews | 46 | Senior Vice President, Chief Information Officer | 2013 | | Amanda Brinkman | 39 | Vice President, Chief Brand and Communications Officer | 2014 | | Keith Bush | 48 | Senior Vice President, Chief Financial Officer | 2017 | | Jeffrey Cotter | 51 | Chief Administrative Officer, Senior Vice President and General Counsel | 2018 | | Barry McCarthy | 55 | President and Chief Executive Officer | 2018 | | Amanda Parrilli | 40 | Vice President, Strategy | 2019 | Risk Factors Strategic Risks The company faces risks in implementing its growth strategies, integrating acquisitions, and managing intense industry competition - Failure to successfully implement growth strategies, especially in increasing MOS revenue, poses a significant risk[85] - Risks include inability to acquire/retain customers, ineffective operation/integration of acquisitions, failure of digital services to gain acceptance, and inability to strengthen the brand[85] - Targeting larger financial institutions for financial technology solutions may cause revenue fluctuations due to client marketing cycles and increase sensitivity to adverse developments affecting significant customers[86] - Intense competition across all business areas, including from alternative payment methods and financial technology companies, could lead to price reductions, reduced profit margins, and customer losses[97][100] - The secular decline in check and forms usage is a core risk, and the company may be unable to offset this decline with other revenue sources[106][109] - Failure to adapt to rapid technological changes in a timely and cost-effective manner could adversely affect business growth[115] Operational Risks Operational risks include cybersecurity threats, IT system interruptions, reliance on third parties, and talent retention - Security breaches, computer malware, or cyber attacks could harm reputation, disrupt operations, and lead to significant financial and legal liabilities[118][121][122] - Interruptions to website operations or IT systems, including legacy systems with minimal vendor support, could damage reputation and harm business[126][128] - Disruption from third-party IT service providers or increased costs for such services could adversely affect business[131][132] - Inability to attract and retain key personnel, especially in digital services, sales, marketing, data analytics, and IT, could hinder business growth[133][134] - Risks associated with the cost and availability of raw materials (e.g., paper), delivery services, and energy could adversely affect operating results[136][137] - Loss of access to external data sources (credit bureaus, data brokers) or increased costs for data could harm the ability to provide certain products and services[138][139] Legal and Compliance Risks The company faces risks from litigation, evolving governmental regulations like data privacy, and intellectual property protection - Involvement in claims, litigation, and other proceedings (e.g., employment practices, contractual breaches, consumer protection, intellectual property) could be costly and distracting[141][142] - Continuous evolution of governmental regulations, including data privacy and security laws (like CCPA), can limit business activities, require operational changes, and increase compliance costs[145][146][147] - Inability to protect intellectual property rights (trademarks, software, patents) could harm business and competitive position[153] - Potential liability for customer activities or content on domain names/websites could damage reputation and adversely affect financial results[154][155] Financial Risks Financial risks include potential asset impairment charges, economic downturns, postretirement plan obligations, and interest rate fluctuations - Goodwill represented 50% of total assets as of December 31, 2018, and impairment charges could negatively impact operating results[157][159][279] - Economic conditions affecting consumer and business spending, small business confidence, and financial institution mergers/acquisitions can adversely affect operating results[160][161][163] - A decline in the value of postretirement medical plan assets or a significant increase in participants could adversely affect operating results and cash flows[164][167] - Variable-rate indebtedness under the credit facility exposes the company to increased interest expense if interest rates rise[168] Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Common Stock Information The company's common stock trades on the NYSE under the symbol DLX, with 6,533 shareholders of record as of year-end 2018 - Common stock is traded on the New York Stock Exchange (NYSE) under the symbol DLX[3] - As of December 31, 2018, there were 6,533 shareholders of record[176] Issuer Purchases of Equity Securities The company repurchased 1.7 million shares in Q4 2018 and has $420.0 million remaining under its share repurchase authorization Issuer Purchases of Common Stock (Q4 2018) | Period | Total number of shares purchased | Average price paid per share | | :--- | :--- | :--- | | October 1, 2018 - October 31, 2018 | — | $ — | | November 1, 2018 - November 30, 2018 | 1,219,252 | $ 49.21 | | December 1, 2018 - December 31, 2018 | 445,786 | $ 44.86 | | Total | 1,665,038 | $ 48.05 | - In October 2018, the board increased the share repurchase authorization to $500.0 million; $420.0 million remained available as of December 31, 2018[178] Comparison of Five-Year Cumulative Total Return The company's five-year cumulative total shareholder return is compared against the S&P MidCap 400 and DJUSIS indices - The comparison assumes an initial investment of $100 on December 31, 2013, with all dividends reinvested, against the S&P MidCap 400 Index and the DJUSIS Index[182] Selected Financial Data Financial Highlights (2014-2018) This section provides a five-year summary of key financial data, including income, balance sheet, and cash flow metrics Selected Financial Data (2014-2018) | Metric | 2018 | 2017 | 2016 | 2015 | 2014 | | :--- | :--- | :--- | :--- | :--- | :--- | | Statement of Income Data: | | | | | | | Total revenue (in thousands) | $ 1,998,025 | $ 1,965,556 | $ 1,849,062 | $ 1,772,817 | $ 1,674,082 | | Gross profit (% of total revenue) | 60.4% | 62.2% | 63.9% | 63.9% | 63.7% | | Operating income (in thousands) | $ 231,221 | $ 329,176 | $ 366,887 | $ 351,634 | $ 330,449 | | Net income (in thousands) | $ 149,630 | $ 230,155 | $ 229,382 | $ 218,629 | $ 199,794 | | EPS - basic | $ 3.18 | $ 4.75 | $ 4.68 | $ 4.39 | $ 3.99 | | EPS - diluted | $ 3.16 | $ 4.72 | $ 4.65 | $ 4.36 | $ 3.96 | | Balance Sheet Data: | | | | | | | Cash and cash equivalents (in thousands) | $ 59,740 | $ 59,240 | $ 76,574 | $ 62,427 | $ 61,541 | | Total assets (in thousands) | $ 2,305,096 | $ 2,208,827 | $ 2,184,338 | $ 1,842,153 | $ 1,683,682 | | Long-term obligations (in thousands) | $ 911,864 | $ 709,300 | $ 758,648 | $ 629,018 | $ 549,603 | | Statement of Cash Flows Data: | | | | | | | Net cash provided by operating activities (in thousands) | $ 339,315 | $ 338,431 | $ 319,312 | $ 309,631 | $ 285,098 | | Payments for acquisitions, net of cash acquired (in thousands) | $ (214,258) | $ (139,223) | $ (239,664) | $ (212,990) | $ (105,029) | | Other Data: | | | | | | | Cash dividends per share | $ 1.20 | $ 1.20 | $ 1.20 | $ 1.20 | $ 1.15 | | Orders (in thousands) | 47,534 | 49,981 | 52,176 | 53,138 | 52,632 | | Revenue per order | $ 42.03 | $ 39.33 | $ 35.44 | $ 33.36 | $ 31.81 | | Number of employees | 6,701 | 5,886 | 6,026 | 5,874 | 5,830 | Management's Discussion and Analysis of Financial Condition and Results of Operations Executive Overview The company focuses on growth through new offerings and acquisitions, though 2018 earnings were impacted by impairment charges - Deluxe focuses on increasing revenue and operating income through new product/service offerings, brand awareness, technology investments, and acquisitions, despite declining check and forms usage[191] - 2018 earnings were negatively impacted by $101.3 million in non-cash asset impairment charges, lower check/forms volume, higher restructuring costs, and $7.2 million in CEO transition costs[192] - These negative impacts were partially offset by $50.0 million in net cost savings from sales, marketing, and fulfillment, and $15.6 million in gains from asset sales[194][195] - For 2019, consolidated revenue is expected to increase in the low single digits, with anticipated EPS growth (excluding one-time charges) despite continued declines in checks/forms and higher material/delivery costs[196][197] - The company plans to focus on integrating 2018 acquisitions and scaling strategy, sales, and product efforts in the first half of 2019, temporarily slowing revenue growth but aiming for a stronger, more scalable company[196] Consolidated Results of Operations Consolidated revenue increased 1.7% in 2018, driven by acquisitions, but gross profit margin declined due to higher costs Consolidated Revenue (in thousands) | Metric | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total revenue | $ 1,998,025 | $ 1,965,556 | $ 1,849,062 | 1.7% | 6.3% | | Orders | 47,534 | 49,981 | 52,176 | (4.9%) | (4.2%) | | Revenue per order | $ 42.03 | $ 39.33 | $ 35.44 | 6.9% | 11.0% | - 2018 revenue increase was driven by $86.7 million from acquired businesses and Small Business Services price increases, partially offset by lower check/forms volume and a $11.0 million decrease in Deluxe Rewards revenue[202] - Service revenue grew to 27.3% of total revenue in 2018, up from 25.2% in 2017 and 20.3% in 2016[204] Consolidated Cost of Revenue (in thousands) | Metric | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total cost of revenue | $ 791,748 | $ 742,707 | $ 667,813 | 6.6% | 11.2% | | Total cost of revenue as % of total revenue | 39.6% | 37.8% | 36.1% | 1.8 pt. | 1.7 pt. | - Cost of revenue increased in 2018 due to $40.5 million from acquired businesses, unfavorable product mix, and increased delivery/material costs, partially offset by $15.0 million in manufacturing efficiencies[206] Consolidated Selling, General & Administrative Expense (in thousands) | Metric | 2018 | 2017 | 2016 | 2018 vs. 2017 | 2017 vs. 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | SG&A expense | $ 854,000 | $ 830,231 | $ 807,238 | 2.9% | 2.8% | | SG&A expense as % of total revenue | 42.7% | 42.2% | 43.7% | 0.5 pt. | (1.5) pt. | - SG&A expense increased in 2018 due to $39.4 million from acquired businesses, $10.5 million in legal costs, higher commission rates, and $7.2 million in CEO transition costs, partially offset by $35.0 million in expense reduction initiatives[209] Restructuring and Integration Expense Restructuring and integration expense increased significantly in 2018 due to acquisition integration and IT system consolidation Restructuring and Integration Expense (in thousands) | Metric | 2018 | 2017 | 2016 | 2018 vs. 2017 | | :--- | :--- | :--- | :--- | :--- | | Restructuring and integration expense | $ 19,737 | $ 8,562 | $ 7,124 | $ 11,175 | - The increase in 2018 was driven by integration and consolidation activities, including information technology costs, employee severance, and moves[211] Asset Impairment Charges The company recorded $101.3 million in pre-tax asset impairment charges in 2018, primarily related to goodwill and trade names Asset Impairment Charges (in thousands) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Asset impairment charges | $ 101,319 | $ 54,880 | $ — | - In Q3 2018, $99.2 million in pre-tax charges were recorded for Small Business Services goodwill and an indefinite-lived trade name, plus Financial Services customer list intangibles[212] - In Q3 2017, $46.6 million in pre-tax charges were recorded for Small Business Services goodwill, the discontinued NEBS trade name, and other non-current assets[213] Loss on Early Debt Extinguishment A pre-tax loss of $7.9 million was recorded in 2016 due to the retirement of $200.0 million of senior notes Loss on Early Debt Extinguishment (in thousands) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Loss on early debt extinguishment | $ — | $ — | $ 7,858 | - The $7.9 million loss in 2016 resulted from retiring $200.0 million of 6.0% senior notes, including a contractual call premium and write-off of debt issuance costs[216] Interest Expense Interest expense increased by 26.9% in 2018 due to higher interest rates and increased debt levels for acquisitions and buybacks Interest Expense (in thousands) | Metric | 2018 | 2017 | 2016 | 2018 vs. 2017 | | :--- | :--- | :--- | :--- | :--- | | Interest expense | $ 27,112 | $ 21,359 | $ 22,302 | 26.9% | | Weighted-average debt outstanding | $ 796,667 | $ 754,289 | $ 620,357 | 5.6% | | Weighted-average interest rate | 3.21% | 2.55% | 2.85% | 0.66 pt. | - The increase in 2018 interest expense was driven by a higher weighted-average interest rate and increased debt levels for share repurchases and acquisitions[217] Income Tax Provision The effective tax rate increased to 29.6% in 2018 due to the impact of a larger non-deductible goodwill impairment charge Income Tax Provision (in thousands) | Metric | 2018 | 2017 | 2016 | 2018 vs. 2017 | | :--- | :--- | :--- | :--- | :--- | | Income tax provision | $ 63,001 | $ 82,672 | $ 111,004 | (23.8%) | | Effective tax rate | 29.6% | 26.4% | 32.6% | 3.2 pt. | - The 2018 effective tax rate increased despite a lower federal statutory rate (21% vs. 35%) due to the larger non-deductible goodwill impairment charge (7.1% impact) and the one-time 2017 Tax Act benefit in 2017 (6.6% reduction)[219][545] - The 2017 Tax Act resulted in a net benefit of approximately $20.5 million to the 2017 income tax provision[220][545] Restructuring and Integration Expense (Detailed) Restructuring activities are driven by cost reduction initiatives and acquisition integration, resulting in significant savings - Restructuring activities are driven by cost reduction initiatives, facility closings, and integration of acquired businesses, primarily including employee severance and IT costs[223] - In 2018, cost savings of approximately $14.0 million in SG&A and $3.0 million in total cost of revenue were realized from employee reductions and facility closings[224] - Most employee reductions are expected by mid-2019, with related severance payments largely completed by Q3 2019[223] CEO Transition Costs The company incurred $7.2 million in CEO transition costs in 2018, with an additional $8.0 million expected in 2019 - CEO transition costs totaled $7.2 million in 2018, including a $2.0 million transition bonus for the former CEO, share-based award modifications, and management retention agreements[225][541][542] - An estimated $8.0 million in CEO transition costs are expected in 2019, with most management retention bonuses to be paid in Q1 2020[225] Segment Results Segment performance varied, with revenue growth in Small Business Services but operating income declines across all three segments Small Business Services Segment Revenue increased 3.5% due to acquisitions, but operating income decreased 34.0% due to higher asset impairment charges Small Business Services Segment Results (in thousands) | Metric | 2018 | 2017 | 2016 | 2018 vs. 2017 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $ 1,283,620 | $ 1,239,739 | $ 1,195,743 | 3.5% | | Operating income | $ 119,808 | $ 181,528 | $ 207,581 | (34.0%) | | Operating margin | 9.3% | 14.6% | 17.4% | (5.3) pt. | - 2018 revenue growth was driven by $53.5 million from acquisitions and price increases, offset by lower check/forms volume and a $6.0 million decrease in search and email marketing[227][229] - Operating income decline was primarily due to a $44.6 million increase in asset impairment charges, lower check/forms volume, higher commission/material/delivery rates, $10.5 million in legal costs, and $5.5 million in restructuring expense[230] - Gains from asset sales contributed $15.6 million in 2018, up from $8.7 million in 2017[230] Financial Services Segment Revenue increased slightly by 0.3%, but operating income decreased 30.8% due to lower check volume and higher costs Financial Services Segment Results (in thousands) | Metric | 2018 | 2017 | 2016 | 2018 vs. 2017 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $ 586,967 | $ 585,275 | $ 499,976 | 0.3% | | Operating income | $ 69,939 | $ 101,047 | $ 106,335 | (30.8%) | | Operating margin | 11.9% | 17.3% | 21.3% | (5.4) pt. | - 2018 revenue growth was driven by increased treasury management solutions revenue and $33.2 million from acquisitions, offset by lower check volume and an $11.0 million decrease in Deluxe Rewards revenue[233] - Operating income decline was due to lower check volume, Deluxe Rewards decline, continued check pricing allowances, innovation investments, increased material/delivery rates, $5.7 million higher restructuring expense, and $3.0 million in CEO transition costs[234] Direct Checks Segment Revenue and operating income decreased by 9.3% and 11.0% respectively, driven by the secular decline in check usage Direct Checks Segment Results (in thousands) | Metric | 2018 | 2017 | 2016 | 2018 vs. 2017 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $ 127,438 | $ 140,542 | $ 153,343 | (9.3%) | | Operating income | $ 41,474 | $ 46,601 | $ 52,971 | (11.0%) | | Operating margin | 32.5% | 33.2% | 34.5% | (0.7) pt. | - Revenue and operating income decreases were primarily due to reduced orders from the secular decline in check usage and increased delivery costs[238][239] - Decreases were partially offset by cost reduction initiatives, including lower advertising expense, and reduced incentive compensation and medical costs[239] Cash Flows and Liquidity Operating cash flow remained stable, while investing cash outflow increased due to acquisitions and financing outflow decreased Cash Flow Activity (in thousands) | Metric | 2018 | 2017 | 2016 | 2018 vs. 2017 | | :--- | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $ 339,315 | $ 338,431 | $ 319,312 | $ 884 | | Net cash used by investing activities | $ (275,414) | $ (180,891) | $ (279,511) | $ (94,523) | | Net cash (used) provided by financing activities | $ (39,825) | $ (182,956) | $ 5,998 | $ 143,131 | - Operating cash flow increased slightly in 2018 due to a $36.6 million reduction in income tax payments and cost reduction benefits, offset by declining check/forms usage and a $6.4 million increase in interest payments[245] - Investing cash outflow increased by $94.5 million in 2018, driven by a $75.0 million increase in acquisition payments and $14.8 million higher capital asset purchases[248] - Financing cash outflow decreased by $143.1 million in 2018, primarily due to a $252.3 million net increase in long-term debt borrowings, partially offset by a $135.0 million increase in share repurchases[250] - The company expects sufficient cash from operations and credit facility availability to support 2019 operations, including dividends, capital expenditures, and potential acquisitions in the second half[255] Capital Resources Total debt increased to $911.9 million in 2018, while shareholders' equity decreased, driven by share repurchases Capital Structure (in thousands) | Metric | December 31, 2018 | Weighted-average interest rate | December 31, 2017 | Weighted-average interest rate | Change | | :--- | :--- | :--- | :--- | :--- | :--- | | Fixed interest rate | $ 1,864 | 2.0% | $ 1,914 | 2.0% | $ (50) | | Floating interest rate | $ 910,000 | 3.8% | $ 707,386 | 3.0% | $ 202,614 | | Total debt | $ 911,864 | 3.8% | $ 709,300 | 3.0% | $ 202,564 | | Shareholders' equity | $ 915,413 | | $ 1,015,013 | | $ (99,600) | - In 2018, $200.0 million of common stock was repurchased, with $420.0 million remaining under the $500.0 million authorization as of December 31, 2018[258] - A new $950.0 million revolving credit facility was established in March 2018, maturing in March 2023. As of December 31, 2018, $29.8 million was available for borrowing, which increased to $1.15 billion in January 2019[261][263] - The company was in compliance with all debt covenants as of December 31, 2018, including a maximum leverage ratio of 3.5 and a minimum interest coverage ratio of 3.0[262] Other Financial Position Information This section details prepaid product discounts, which are recorded as non-current assets and amortized over contract terms - Prepaid product discounts are recorded as non-current assets and amortized as reductions of revenue over the contract term (1-10 years, weighted-average 6 years)[267][382] - Cash payments for prepaid product discounts were $23.8 million in 2018, $27.1 million in 2017, and $23.1 million in 2016[267][465] - Accruals for prepaid product discounts were $10.9 million (current) and $12.5 million (non-current) as of December 31, 2018[269] Off-Balance Sheet Arrangements, Guarantees and Contractual Obligations The company does not typically engage in off-balance sheet arrangements and has total contractual obligations of $1.07 billion - Deluxe does not generally enter into off-balance sheet arrangements or guarantee third-party performance[271] - Indemnification agreements are common for products/services and asset dispositions, but potential liabilities for unknown conditions are not estimable[271] Contractual Obligations as of December 31, 2018 (in thousands) | Obligation | Total | 2019 | 2020 and 2021 | 2022 and 2023 | 2024 and thereafter | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term debt | $ 910,000 | $ — | $ — | $ 910,000 | $ — | | Lease obligations | $ 60,746 | $ 17,301 | $ 23,243 | $ 9,146 | $ 11,056 | | Purchase obligations | $ 61,679 | $ 30,686 | $ 29,929 | $ 1,064 | $ — | | Other non-current liabilities | $ 40,548 | $ 19,527 | $ 17,462 | $ 1,755 | $ 1,804 | | Total contractual obligations | $ 1,072,973 | $ 67,514 | $ 70,634 | $ 921,965 | $ 12,860 | - Excluded from contractual obligations are uncertain tax positions ($6.0 million liability as of Dec 31, 2018) and a portion of deferred compensation plan liabilities due to unpredictable timing of payments[274] Critical Accounting Policies Critical accounting policies involve significant management judgment, particularly for goodwill impairment and business combinations Impairment of Goodwill and Indefinite-Lived Trade Name Goodwill, representing 50.4% of total assets, is tested annually for impairment, resulting in significant charges in 2018 - Goodwill totaled $1,160.6 million (50.4% of total assets) as of December 31, 2018[279] - In 2018, a $78.2 million pre-tax goodwill impairment charge was recorded for Small Business Services Indirect, and a $19.1 million pre-tax impairment charge for the indefinite-lived Safeguard trade name[284][287][500] - The impairment was due to lowered projected long-term revenue growth and profitability, and a shift in company resources to growing businesses[284] - The Small Business Services Web Services reporting unit's fair value exceeded its carrying value by 22% in 2018, but is sensitive to revenue growth and discount rate changes[282] - The Financial Services Data-Driven Marketing reporting unit's fair value exceeded its carrying value by 36% in 2018, but is sensitive to revenue growth and discount rate changes[285] Business Combinations Purchase price allocation for acquisitions requires significant judgment in estimating the fair values of intangible assets - Purchase price allocation for acquisitions involves estimating fair values of acquired assets and liabilities, particularly intangible assets, using significant judgment[290] - Valuation methods include the multi-period excess earnings method for customer lists and the relief from royalty method for technology and trade names[292][293] - Fair value of contingent consideration is determined by discounting probability-weighted contingent payments[294] Income Taxes Income tax estimates involve significant judgment, with the 2017 Tax Act impacting recent effective tax rates - Estimating income taxes requires significant judgment for current tax expense, deferred tax assets/liabilities, and uncertain tax positions[298][299] - The 2017 Tax Act provided a net benefit of approximately $20.5 million to the 2017 income tax provision, with a further $1.7 million net benefit in 2018[302][303] - Unremitted foreign earnings ($51.3 million in cash and equivalents as of Dec 31, 2018) are intended for indefinite reinvestment, limiting repatriation tax effects to an estimated $2.5 million in foreign withholding taxes[304] - A one-percentage-point change in the effective income tax rate would result in a $2.1 million change in income tax expense for 2018[305] Revenue Recognition The company adopted a new revenue recognition standard in 2018, recognizing revenue when control of goods or services transfers - Adopted ASU No. 2014-09 on January 1, 2018; product revenue is recognized when control is transferred, and service revenue as services are provided[306][395][396] - The company is generally considered the principal for product sales and Safeguard distributor sales, recognizing gross revenue, but an agent for Financial Services rewards programs, recognizing net revenue[307][399] - Variable consideration for data-driven marketing and treasury management outsourcing services is recognized based on the most likely amount to be realized, with revenue from these contracts approximately $130.0 million in 2018[309][402] - Sales commissions for check supply and treasury management solution contracts are deferred as non-current assets and amortized as SG&A expense over 3 to 6 years[310][406] Postretirement Benefit Plan The postretirement benefit plan was overfunded by $41.3 million as of year-end 2018 and generated net income of $3.6 million - Net postretirement benefit income was $3.6 million in 2018, $2.0 million in 2017, and $1.8 million in 2016[313] - Effective January 1, 2018, net periodic benefit income is recorded in the non-operating section of the income statement due to ASU No. 2017-07[313][425] - The accumulated postretirement benefit obligation was $73.7 million as of December 31, 2018, with a discount rate assumption of 4.13%[315][588][594] - The fair value of plan assets was $115.0 million as of December 31, 2018, with an expected long-term rate of return of 6.25% for 2018[316][318][588][594] - The plan was overfunded by $41.3 million as of December 31, 2018[276][588] New Accounting Pronouncements The company adopted new standards for revenue recognition and restricted cash in 2018 and will adopt a new leasing standard in 2019 - ASU No. 2014-09 (Revenue from Contracts with Customers) was adopted on January 1, 2018, using the modified retrospective method, with minimal impact on results[414] - ASU No. 2016-18 (Restricted Cash) was adopted on January 1, 2018, retrospectively, requiring cash flow statements to include restricted cash[419] - ASU No. 2017-07 (Pension/Postretirement Benefit Cost) was adopted on January 1, 2018, retrospectively reclassifying net periodic benefit income to other income[425] - ASU No. 2016-02 (Leasing) is effective January 1, 2019, and is expected to result in the recognition of at least $45.0 million in lease assets and liabilities for operating leases[437][438] Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk The company is exposed to interest rate risk from its variable-rate debt, with total debt of $911.9 million at year-end 2018 Total Debt as of December 31, 2018 (in thousands) | Metric | Carrying amount | Fair value (1) | Weighted-average interest rate | | :--- | :--- | :--- | :--- | | Amount drawn on revolving credit facility | $ 910,000 | $ 910,000 | 3.8% | | Capital lease obligations | $ 1,864 | $ 1,864 | 2.0% | | Total debt | $ 911,864 | $ 911,864 | 3.8% | - A one-percentage-point change in weighted-average interest rates would have resulted in a $7.9 million change in interest expense for 2018[324] Foreign Currency Exchange Rate Risk The company has minimal exposure to foreign currency exchange rate risk as foreign operations are a small part of the business - Exposure to foreign currency exchange rates is primarily from Canadian and Australian dollar-denominated operations[325] - The effect of exchange rate changes is expected to have a minimal impact on earnings and cash flows, as foreign operations are a relatively small portion of the business[325] Financial Statements and Supplementary Data Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued unqualified opinions on the company's financial statements and internal controls - PricewaterhouseCoopers LLP issued an unqualified opinion on the consolidated financial statements for the three years ended December 31, 2018[328] - An unqualified opinion was also issued on the effectiveness of internal control over financial reporting as of December 31, 2018[328] Consolidated Balance Sheets Total assets increased to $2.31 billion in 2018, while total shareholders' equity decreased to $915.4 million Consolidated Balance Sheet Highlights (in thousands) | Metric | December 31, 2018 | December 31, 2017 | | :--- | :--- | :--- | | Cash and cash equivalents | $ 59,740 | $ 59,240 | | Total current assets | $ 450,046 | $ 392,966 | | Goodwill | $ 1,160,626 | $ 1,130,934 | | Total assets | $ 2,305,096 | $ 2,208,827 | | Total current liabilities | $ 392,050 | $ 425,770 | | Long-term debt | $ 911,073 | $ 665,260 | | Total liabilities | $ 1,390,003 | $ 1,193,814 | | Total shareholders' equity | $ 915,413 | $ 1,015,013 | Consolidated Statements of Income Total revenue increased 1.7% to $2.0 billion in 2018, but net income decreased significantly to $149.6 million Consolidated Statements of Income Highlights (in thousands, except per share amounts) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total revenue | $ 1,998,025 | $ 1,965,556 | $ 1,849,062 | | Total cost of revenue | $ (791,748) | $ (742,707) | $ (667,813) | | Gross profit | $ 1,206,277 | $ 1,222,849 | $ 1,181,249 | | Selling, general and administrative expense | $ (854,000) | $ (830,231) | $ (807,238) | | Asset impairment charges | $ (101,319) | $ (54,880) | $ — | | Operating income | $ 231,221 | $ 329,176 | $ 366,887 | | Net income | $ 149,630 | $ 230,155 | $ 229,382 | | Diluted earnings per share | $ 3.16 | $ 4.72 | $ 4.65 | - Net income decreased by 34.9% in 2018 compared to 2017, primarily due to higher asset impairment charges and increased SG&A expenses[340] Consolidated Statements of Comprehensive Income Comprehensive income was $137.5 million in 2018, a decrease from $242.9 million in 2017 due to lower net income and other losses Consolidated Statements of Comprehensive Income Highlights (in thousands) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net income | $ 149,630 | $ 230,155 | $ 229,382 | | Other comprehensive (loss) income, net of tax | $ (12,115) | $ 12,774 | $ 4,832 | | Comprehensive income | $ 137,515 | $ 242,929 | $ 234,214 | - Other comprehensive loss in 2018 was primarily driven by a net actuarial loss of $3.8 million and unrealized foreign currency translation adjustment of $9.3 million[343] Consolidated Statements of Shareholders' Equity Total shareholders' equity decreased to $915.4 million in 2018, primarily due to share repurchases and cash dividends Consolidated Statements of Shareholders' Equity Highlights (in thousands) | Metric | December 31, 2018 | December 31, 2017 | | :--- | :--- | :--- | | Common shares (outstanding) | 44,647 | 47,953 | | Retained earnings | $ 927,345 | $ 1,004,657 | | Accumulated other comprehensive loss | $ (56,579) | $ (37,597) | | Total shareholders' equity | $ 915,413 | $ 1,015,013 | - Key factors impacting equity in 2018 were $200.0 million in common shares repurchased and $56.7 million in cash dividends paid[346] Consolidated Statements of Cash Flows Operating cash flow was stable at $339.3 million, while investing cash outflow increased due to higher acquisition payments Consolidated Statements of Cash Flows Highlights (in thousands) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $ 339,315 | $ 338,431 | $ 319,312 | | Net cash used by investing activities | $ (275,414) | $ (180,891) | $ (279,511) | | Net cash (used) provided by financing activities | $ (39,825) | $ (182,956) | $ 5,998 | | Purchases of capital assets | $ (62,238) | $ (47,450) | $ (46,614) | | Payments for acquisitions, net of cash acquired | $ (214,258) | $ (139,223) | $ (239,664) | | Payments for common shares repurchased | $ (200,000) | $ (65,000) | $ (55,224) | | Cash dividends paid to shareholders | $ (56,669) | $ (58,098) | $ (58,720) | - Payments for acquisitions, net of cash acquired, increased by $75.0 million in 2018 compared to 2017[349] - Net change in debt was $201.1 million in 2018, compared to a net decrease of $51.2 million in 2017[349] Note 1: Significant Accounting Policies This note outlines the company's significant accounting policies, including consolidation, use of estimates, and revenue recognition - Deluxe provides customer life cycle management solutions to small businesses, financial institutions, and direct consumers[352] - Financial statements are prepared in conformity with GAAP, requiring significant assumptions and estimates[356] - Goodwill and indefinite-lived trade names are tested for impairment annually or more frequently if circumstances indicate[375] - Revenue recognition policy changed in 2018 with ASU No. 2014-09, recognizing product revenue upon transfer of control and service revenue as provided[395][396] - Employee share-based compensation includes non-qualified stock options, restricted stock units, restricted stock, performance share awards, and an employee stock purchase plan[407] Note 2: New Accounting Pronouncements This note details the impact of new accounting standards, including the 2018 adoption of a new revenue recognition standard - ASU No. 2014-09 (Revenue from Contracts with Customers) adopted January 1, 2018, using modified retrospective method, with cumulative effect adjustment to retained earnings[414] Impact of ASU No. 2014-09 on Consolidated Balance Sheet (January 1, 2018, in thousands) | Metric | As previously reported | Effect of adoption | As revised | | :--- | :--- | :--- | :--- | | Revenue in excess of billings | $ 16,379 | $ 960 | $ 17,339 | | Other non-current assets | $ 159,756 | $ 5,733 | $ 165,489 | | Deferred income taxes | $ 50,543 | $ 1,727 | $ 52,270 | | Retained earnings | $ 1,004,657 | $ 4,966 | $ 1,009,623| - ASU No. 2016-18 (Restricted Cash) adopted January 1, 2018, retrospectively, requiring inclusion of restricted cash in cash flow statements[419] - ASU No. 2017-07 (Pension/Postretirement Benefit Cost) adopted January 1, 2018, retrospectively reclassifying net periodic benefit income to other income[425] - ASU No. 2018-02 (Reclassification of Certain Tax Effects from AOCI) early adopted January 1, 2018, reclassifying $6.867 million from AOCI to retained earnings[431] - ASU No. 2016-02 (Leasing) is effective January 1, 2019, and is expected to result in the recognition of at least $45.0 million in lease assets and liabilities[437][438] Note 3: Supplemental Balance Sheet and Cash Flow Information This note provides detailed breakdowns of balance sheet accounts, including receivables, inventories, intangibles, and goodwill Trade Accounts Receivable - Net (in thousands) | Metric | December 31, 2018 | December 31, 2017 | | :--- | :--- | :--- | | Trade accounts receivable – gross | $ 177,501 | $ 152,728 | | Allowances for uncollectible accounts | $ (3,639) | $ (2,884) | | Trade accounts receivable – net | $ 173,862 | $ 149,844 | Inventories and Supplies (in thousands) | Category | December 31, 2018 | December 31, 2017 | | :--- | :--- | :--- | | Raw materials | $ 7,543 | $ 7,357 | | Semi-finished goods | $ 7,273 | $ 7,635 | | Finished goods | $ 27,608 | $ 24,146 | | Supplies | $ 4,017 | $ 3,111 | | Inventories and supplies | $ 46,441 | $ 42,249 | Intangibles (Net Carrying Amount, in thousands) | Category | December 31, 2018 | December 31, 2017 | | :--- | :--- | :--- | | Indefinite-lived trade name | $ — | $ 19,100 | | Internal-use software | $ 80,164 | $ 75,005 | | Customer lists/relationships | $ 208,597 | $ 221,860 | | Trade names | $ 24,441 | $ 16,995 | | Technology-based intangibles | $ 25,293 | $ 25,400 | | Software to be sold | $ 21,470 | $ 25,696 | | Other amortizable intangibles | $ — | $ 210 | | Total Intangibles (Net) | $ 359,965 | $ 384,266 | - Amortization expense for intangibles was $114.5 million in 2018, up from $106.8 million in 2017[455] Goodwill by Reportable Segment (Net, in thousands) | Segment | December 31, 2018 | December 31, 2017 | | :--- | :--- | :--- | | Small Business Services | $ 638,699 | $ 658,189 | | Financial Services | $ 373,421 | $ 324,239 | | Direct Checks | $ 148,506 | $ 148,506 | | Total Goodwill | $ 1,160,626 | $ 1,130,934 | Other Non-Current Assets (in thousands) | Category | December 31, 2018 | December 31, 2017 | | :--- | :--- | :--- | | Loans and notes receivable from distributors | $ 78,693 | $ 44,276 | | Prepaid product discounts | $ 54,642 | $ 63,895 | | Postretirement benefit plan asset | $ 41,259 | $ 39,849 | | Deferred sales commissions | $ 6,482 | $ — | | Deferred advertising costs | $ 5,746 | $ 6,135 | | Other | $ 9,286 | $ 5,601 | | Total Other Non-Current Assets | $ 196,108 | $ 159,756 | Accrued Liabilities (in thousands) | Category | December 31, 2018 | December 31, 2017 | | :--- | :--- | :--- | | Funds held for customers | $ 99,818 | $ 85,091 | | Deferred revenue | $ 54,313 | $ 47,021 | | Employee profit sharing/cash bonus | $ 31,286 | $ 31,312 | | Prepaid product discounts due within one year | $ 10,926 | $ 11,670 | | Customer rebates | $ 9,555 | $ 11,508 | | Income tax | $ 7,991 | $ 17,827 | | Acquisition-related liabilities | $ 4,850 | $ 23,878 | | Restructuring and integration | $ 3,320 | $ 4,380 | | Other | $ 62,222 | $ 44,566 | | Total Accrued Liabilities | $ 284,281 | $ 277,253 | Note 4: Earnings Per Share This note details the calculation of basic and diluted earnings per share, which were $3.18 and $3.16 respectively in 2018 Earnings Per Share Calculation (in thousands, except per share amounts) | Metric | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Earnings per share – basic: | | | | | Net income | $ 149,630 | $ 230,155 | $ 229,382 | | Income available to common shareholders | $ 149,013 | $ 228,698 | $ 227,512 | | Weighted-average shares outstanding | 46,842 | 48,127 | 48,562 | | Earnings per share – basic | $ 3.18 | $ 4.75 | $ 4.68 | | Earnings per share – diluted: | | | | | Income available to common shareholders | $ 148,543 | $ 228,764 | $ 227,820 | | Weighted-average shares and potential common shares outstanding | 46,991 | 48,448 | 48,975 | | Earnings per share – diluted | $ 3.16 | $ 4.72 | $ 4.65 | | Antidilutive options excluded from calculation | 1,209 | 262 | 214 | Note 5: Other Comprehensive (Loss) Income This note details the components of other comprehensive income and loss, with accumulated loss increasing to $56.6 million Reclassification Adjustments from Accumulated Other Comprehensive Loss to Net Income (in thousands) | Component | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | | Total amortization (postretirement benefit plan items) | $ (1,463) | $ (2,216) | $ (2,376) | | Tax benefit | $ 491 | $ 372 | $ 724 | | Total reclassifications, net of tax | $ (972) | $ (1,844) | $ (1,652) | Accumulated Other Comprehensive Loss Components (in thousands) | Component | December 31, 2018 | December 31, 2017 | | :--- | :--- | :--- | | Postretirement benefit plans, net of tax | $ (36,529) | $ (26,829) | | Net unrealized loss on marketable debt securities, net of tax | $ (323) | $ (322) | | Currency translation adjustment | $ (19,727) | $ (10,446) | | Accumulated other comprehensive loss | $ (56,579) | $ (37,597) | Note 6: Acquisitions The company completes acquisitions to increase MOS revenue and expand capabilities, with several key purchases in 2018 - Acquisitions are primarily aimed at increasing MOS revenue, adding financial technology and web services capabilities, and reaching new customers[479] - In 2018, key acquisitions included Logomix Inc. (marketing/branding), ColoCrossing (data center/hosting), My Corporation Business Services (incorporation services), and REMITCO LLC (remittance processing)[479][480] - Goodwill resulting from 2018 acquisitions totaled $105.9 million, with significant amounts also allocated to customer lists/relationships ($59.6 million) and trade names ($14.7 million)[460][492] - In 2017, acquisitions included Australian web hosting providers (Panthur, Digital Pacific, Web24) and RDM Corporation (remote deposit capture)[481][482] - In 2016, acquisitions included web hosting (MacHighway, Liquid Web), promotional products (Inkhead), payroll processing (Payce), and data-driven marketing (FMCG)[484] Aggregate Purchase Price Allocation for Acquisitions (in thousands) | Category | 2018 acquisitions | 2017 acquisitions | 2016 acquisitions | | :--- | :--- | :--- | :--- | | Net tangible assets acquired and liabilities assumed | $ 9,366 | $ (1,956) | $ (8,804) | | Identifiable intangible assets: | | | | | Customer lists/relationships | $ 59,587 | $ 58,620 | $ 116,491 | | Trade names | $ 14,700 | $ 10,000 | $ 3,800 | | Software to be sold | $ — | $ 2,200 | $ 6,200 | | Technology-based intangibles | $ 7,500 | $ 800 | $ 31,000 | | Internal-use software | $ — | $ 1,445 | $ 10,450 | | Total intangible assets | $ 81,787 | $ 73,065 | $ 167,941 | | Goodwill | $ 105,907 | $ 63,941 | $ 127,197 | | Total aggregate purchase price | $ 197,060 | $ 135,050 | $ 286,334 | Note 7: Derivative Financial Instruments The company had no derivative financial instruments outstanding as of year-end 2018 or 2017 - No derivative financial instruments were outstanding as of December 31, 2018, or December 31, 2017[392][494] - In 2016, interest rate swaps hedging long-term debt were settled, resulting in a $2.842 million cash payment[494] Note 8: Fair Value Measurements This note details fair value measurements for asset impairments, acquisitions, and recurring financial instruments - In 2018, a $78.2 million goodwill impairment charge was recorded for Small Business Services Indirect, and a $19.1 million impairment charge for the Safeguard trade name[500] - In 2017, a $28.4 million goodwill impairment charge was recorded for Small Business Services Safeguard reporting unit, and a $14.8 million charge fo